Where Have All the Profits Gone? European Bank Profitability Over the Financial Cycle

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Summary:

The paper investigates EU banks’ profitability through the recent financial cycle using banklevel
balance sheet and income statement data. We find that banks that were more successful
at protecting their profits had a less pronounced deterioration in loan quality and a larger
improvement in cost efficiency. They also downsized their assets more aggressively during
the crisis, and reduced reliance on wholesale funding more markedly post-crisis. Net interest
margins remained broadly stable over the financial cycle, including post-crisis, and there is
no clear evidence that aspects of bank business model, such as higher reliance on fees and
commission income, were associated with better profitability post-crisis.